... And then Sept. 6, I guess, Fannie Mae and Freddie Mac needed a rescue. That was the first thing that you saw. If Fannie Mae and Freddie Mac hadn't been saved, I remember one guy, a former Treasury official, saying to me explicitly, "Global capitalism would have ended; it would have ceased," because Fannie Mae and Freddie Mac represent something like $5 trillion of bonds that undergird a huge portion of the global financial system. They're seen as almost as safe as U.S. Treasuries, almost the same as a U.S. Treasury [bill]. And you would have just seen a complete seizing up of capital markets.

I remember that was the week that felt the most like coming back from Iraq on vacation. That was the week where I felt like I was in a different place than everyone else I knew in my life, because I was seeing the collapse of our way of life as a real possibility. ... I saw not just a slowly increasing number of economists saying it; I saw everybody saying it. ... That was the week I personally was scared. ... I think that was the week that I realized that it's truly possible for money to stop moving. ...

It's the economic equivalent of 9/11 in my view, having been here for both events, ... sitting in that room with Hank Paulson saying to us, in very measured tones, no hyperbole, no excessive adjectives, that unless you act, the financial system of this country and the world will melt down in a matter of days. There was literally a pause in that room where the oxygen left.

Literally -- I know I'm drawing too close of an analogy here given the lives lost on 9/11, but it's that kind of a moment. This is not some analyst. This is not some functionary at the Treasury. This is the chairman of the Federal Reserve Bank, the most important central bank in the world, announcing to the leadership, Republicans and Democrats of Congress, "Unless we act within days, the financial system will melt down." And so the next 13 days were historic here.

But then came AIG. And to me, AIG was the low point of this crisis, and the reason is that this was a huge insurance company that had a very good credit rating that was outside the Fed's regulatory framework. The Fed doesn't regulate insurance companies. But lo and behold, it had been using its good credit rating to acquire these mortgage-backed securities.

That, to me, was the most demoralizing moment of this crisis. To me, this signaled everything that this crisis was about: You have a regulatory framework that's just out of whack with the financial system. You have financial institutions that are gaming the system. AIG is a big entity. This causes chaos in the market. And personally, people say, "Oh, you should have seen the crisis." I don't see how anybody could have seen this, certainly, anybody policy-making. The Fed has regulatory responsibilities, but AIG was not within the Fed's regulatory net. ...

As the consequences of Lehman start playing out -- problems with money markets, trouble with credit sort of drying up and everything else -- what does this do to the folks in Washington as they're sort of watching this happen? What lessons are they learning from this?

This is DEFCON 4, whatever. This was the complete nightmare. I remember looking at the stress measures on, you know, middle of the day Monday and saying, "Gee, they're looking kind of spiky." And by Wednesday, you'd basically had a complete shutdown of the world capital market. No, this is actually terror. I'm sure that Paulson is sitting there, doesn't strike me as the most reflective guy necessarily, but he must have been sitting there -- everybody was sitting there saying, "My God, we may be presiding over the second Great Depression." This is the utter nightmare of an economic policy-maker. You're sitting there, and you may have just made the decision that destroyed the world. Absolutely terrifying moment.